Euro-mortgages for the people?

Ever since the euro was launched in January UK borrowers have been jealously eyeing the dramatically lower mortgage rates in countries such as Germany and saying: "I want some of that."

A couple of UK banks have launched euro mortgages with mouth-watering variable rates of around 4.6 per cent. But most people are excluded from these because to be eligible you must be paid in euros.

However, it would appear the winds of change are blowing and that could be good news for consumers fed up with paying more than those on the Continent.

This week saw the launch of what has been hailed in some quarters as a European mortgage product for the UK masses - the first-ever sterling home loan linked to European interest rates.

The timing of the announcement was a bit unfortunate, however, coming as it did just hours before the entire 20-strong European Commission resigned following a damning report into fraud and mismanagement.

The mortgage has been launched by Nationwide Building Society. It has several attractive features, mainly an interest rate 1.75 per cent above the European Central Bank rate (currently 3 per cent) for 10 years, giving a current variable rate of 4.75 per cent. There is a 1 per cent discount in the first year, taking what you pay down to just 3.75 per cent.

Because the loan is sterling-denominated it does not have any exchange rate risk, unlike foreign currency mortgages which caused some grief a few years back.

But, say some experts, strip away the fancy packaging and what you are left with is a discount mortgage deal that, although attractively priced, locks you in for a very long time. There are early redemption penalties for 10 years.

Also, it represents something of a gamble. If the UK joins the single currency in three to four years' time, it won't look nearly such a good deal. Say the UK joins in 2002, and European interest rates are the same as they are today: the UK's base rate will be 3 per cent.

In that situation, 1.75 per cent above a base rate of 3 per cent is one hell of a fat margin, says Patrick Bunton at mortgage brokers London & Country. But if the UK doesn't join up until some time after that, and in the meantime our interest rates don't come down much further, you could be on a winner.

The loan will reflect changes to the ECB base rate within 50 days - if that goes up or down, so will what you pay. Initially the omens are looking good. Most economists predict the next European base rate move will be downwards.

The Nationwide has christened its new baby the European Tracker Mortgage. It is available to people moving home (re-mortgagers aren't eligible) from March 24, though only a limited amount of funds are being made available.

The penalties for redeeming the loan early are pretty hefty. A fee of nine months' gross interest must be paid within the first five years, falling to three months' gross interest in years nine and 10. After 10 years the rate reverts to Nationwide's standard variable rate.

While the concept of a home loan linked to the European interest rate environment is new, you can already obtain mortgages that track the UK base rate. Skipton Building Society and Birmingham Midshires MSL both offer tracker home loans at 0.75 per cent above UK base rate (the Skipton's has a 1 per cent discount for two years).

If you fancy a discount mortgage that's a bit more traditional and doesn't come with nasty penalties, there are a number of good ones around. They include:? Nationwide's 1.3 per cent off the stardard variable rate for two years, giving a current payment rate of 5.15 per cent. Alternatively it is offering 1.1 per cent off for three years - current payment rate 5.35 per cent.? Halifax Mortgage Services's 1.45 per cent off until May 2001, giving a payment rate of 5.5 per cent. ? Alliance & Leicester's 1.75 per cent off for three years, giving a payment rate of 5.3 per cent.

If you are prepared to put up with redemption penalties you can get even cheaper discount deals. Stroud & Swindon is offering a 3 per cent discount for six months, giving a payment rate of 3.95 per cent, but there is a three-year redemption period.

The only two major lenders offering euro mortgages are Abbey National and Barclays. These are both variable rate products and are priced at 4.57 per cent and 4.59 per cent respectively. In both cases, to take one out you have to be paid in euros.

How the societies still try it on
By Richard Cobley


One might be excused for thinking that a mortgage marketed as having a rate "1 per cent over base rates "would require the borrower to pay interest at 1 percentage point over bank base rates.

Certainly, when a firm of financial advisers arranged such a mortgage with the Skipton Building Society, that is what they expected to pay. In fact the Skipton charged them rates up to 3 percentage points higher.

When the firm took the matter to the Building Societies Ombudsman a decision, hardly surprisingly, was made in their favour. The Skipton was ordered to repay the amounts it had claimed over the rate it had offered, and told to pay ?500 compensation for the expense and inconvenience to which its mishandling of the matter had put the firm. The Ombudsman was singularly unimpressed with the Skipton's argument that small print in its standard terms and conditions entitled it to renege on a clear promise given by its staff.

The Skipton wasn't the first and won't be the last building society to be taken to the Ombudsman for trying it on with interest rates. However, it has decided not to comply with the decision. Since the Ombudsman scheme was set up only one society, the now-defunct Cheshunt, has taken this course, in a complicated argument in 1988 over redemption penalties.

When the statutory scheme was introduced by the Building Societies Act 1986, the industry persuaded the Government that decisions should not be binding on societies. Instead, societies that do not accept a decision have the option of making a public statement about the matter.

In contrast, the banking and insurance industries have set up voluntary schemes of their own. But it is a condition of membership that the organisation agrees to accept any decision of the Ombudsman. Customers who feel they have had a raw deal are still free to take the matter to the courts under any of the schemes.

The Skipton had to take out advertisements in a number of newspapers last weekend trying to excuse its non-compliance. It says that if it had complied with the decision it would have been offering a lower rate on a commercial mortgage than on a residential one.

Bizarrely, another reason it gives for dissenting from the decision is that the customer was legally advised. But the likelihood is that any lawyer advising when the customer took out the mortgage would have come to the same view that the Ombudsman reached: that "l per cent over base" means one percentage point over base.

Obscure words that purported to allow the society to charge a different rate would fall foul of the Unfair Contract Terms Act 1977. In any case, the Ombudsman said his powers go further than those of the courts. A spokeswoman said: "He can decide what is fair and reasonable and where appropriate go beyond the letter of the law to reach a fair decision."

The Government is considering whether building societies and other lenders are capable of self-regulation, or whether they need closer statutory control. Although a spokesman for the Skipton claimed: "We work extremely closely with the Ombudsman," he went on to say: "Our board didn't consider there was any reason why the Ombudsman should prefer the customer's case to ours."

This sentiment is echoed by the vast majority of those who have judgment given against them. Most people have no choice but to accept an objective judgment however unpalatable. The spectre of a leading building society blithely picking and choosing which decisions to respect could be the death-knell for credibility of the industry's claims to be able to regulate itself.

What the experts say


Rob Clifford at MPI: "A lot of people are saying: 'Why are we paying 7 per cent when when in Europe you can get 4.5 per cent?' Nationwide are satisfying a demand that definitely exists."

He describes the product as "a very clever marketing concept," adding: "It is genuinely linked to the European rate... but what Nationwide is doing is really nothing more sophisticated than any other discounted product. They are linking it to a base rate different to our own." He believes we could well see other lenders launching similar products. "I would be very surprised if other folk don't follow suit."

Ray Boulger at John Charcol: "I think that it is quite an interesting product. It is clearly innovative. It is best compared with a traditional discount mortgage. However, it has added advantages: it is linked to the lower Euroland rates, and it is also linked to bank base rate rather than the, higher, mortgage base rate."

But a significant narrowing of the margin between the Bank of England and ECB base rates (currently 5.5 and 3 per cent respectively) would make this deal look less attractive.

"People who will find this the most attractive are those who believe we will not join the single currency for some time to come. They are more likely to consider the redemption penalties as an acceptable price to pay in exchange for getting Euroland interest rates now." Patrick Bunton at London & Country: He is sceptical, saying the mortgage is bound to generate a lot of interest but is "not necessarily a good idea". It is easy to forget that if the UK joins the single currency in 2002 the ECB base rate, currently 3 per cent, will become our base rate.

In those circumstances, paying 1.75 per cent over a 3 per cent base rate won't look particularly good value (assuming the ECB rate is the same in 2002 as it is now). The difference between the UK bank base rate and Nationwide's standard variable mortgage rate is currently a much slimmer 0.95 per cent.